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Market Massacre

The key theme [in identifying contemporary economic problems and solutions] is that these are structural and systemic failures, and not ones that can be addressed by panicking and “saving the system”. No matter how much money we inject into markets, unless bad ideas are allowed to fail, and good ones to prosper, unless bad investments result in losses, and good ones in gains, unless bad decisions result in failure, and good ones in reward, then all of that money is wasted. If anything, we need bad systems to break. We should take the consequences, and start rebuilding more robust systems.

Attempts to address structural concerns have been sloppy and mismanaged at best, and utterly disastrous at worst. And right on cue, global markets go into meltdown. From the Guardian:

Almost £50bn was wiped off the value of Britain’s 100 biggest companies on a day of global stock market mayhem triggered by a deepening of the eurozone crisis and fears for the health of the US economy.

After a day of massive of stock market falls in Europe and the US of a kind not seen since the depths of the last economic downturn, traders said on Thursday the atmosphere in the markets was reminiscent of the banking crisis of October 2008.

“For many traders this week has felt like the start of the banking crisis in 2008, which would go some way to explaining the panic selling we have seen today,” said Will Hedden, sales trader at IG Index.

Rumours were swirling around the City that hedge funds were being forced to sell assets such as gold in order to cover deepening losses on other investments. This led to a surprise 1% drop in the value of gold, which in recent weeks had risen to record highs of more than £1,000 an ounce as a safe haven bet during the eurozone and US debt crisis. Brent crude prices fell 5% to $107 a barrel amid signs of slowdown in the west’s major economies.

Anxiety over the debt crisis in the eurozone, and increasingly in Italy, had set the tone for nervous trading during the London morning, but the pace of the decline accelerated as Wall Street opened sharply lower. In the US the Dow Jones closed down 4.3%, making it the worst day for the index since 22 October 2008. The S&P 500 was 4.8% lower and the Nasdaq lost 5.1%.

Despite this week’s 11th-hour agreement to raise the US debt ceiling, Wall Street is becoming increasingly anxious about the health of the world’s biggest economy. A major test will come on Friday with the release of keenly watched US employment data that will provide the latest health check of an economy that barely grew in the first half of the year.